UBS warns: Bond traders are betting on the "2022 script" under the Iran conflict, but this time they may be very wrong.

UBS Group's Chief Strategist Bhanu Baweja stated that traders are betting on major central banks taking coordinated action to address the long-term threat of war in Iran, but this expectation may lead them to misjudge the situation. Baweja said in an interview, "The way the market is pricing is as if we are back in 2022, expecting all central banks to act in unison, but the reality now is very different." He also mentioned that a more likely scenario is an "asymmetric" situation, with the European Central Bank, the Federal Reserve, and the Bank of England taking differentiated measures. The strategist believes that U.S. and UK government bonds in particular reflect an unrealistic expectation that inflation pressures will prompt central banks to start another round of rate hikes similar to those in 2022. Since the outbreak of the Iran conflict at the end of February, the market has increased bets on rate hikes by major economies, pushing up government bond yields. Baweja stated that investors willing to go against the trend may actually find value in short-term bonds with the fastest rising yields. The chaos in the energy market is more likely to weaken the economy, preventing central banks from taking further tightening measures to slow economic growth. Baweja said, "Value is being created, especially in the front end of the fixed income markets in the UK and the U.S." On Tuesday, European bonds fell, with short-term bonds leading the decline, as the money market further increased bets on tightening policies. The yield on German two-year government bonds rose by 6 basis points to 2.68%. U.S. bonds with various maturities also saw declines. Currently, the market is weighing signs of possible easing of tensions in the Middle East against threats from US President Trump - if an agreement is not reached by the deadline of Tuesday evening at 8pm Eastern Time, he will escalate strikes on Iran's infrastructure. Baweja stated that bonds will remain in a strong position if the conflict is resolved quickly. He pointed out, "If the situation improves, fixed income products, especially short-term ones, will perform much better than during worsening conditions."